Insolvency & Bankruptcy Code (3rd Amendment) Bill, 2019
The Insolvency & Bankruptcy Code (3rd Amendment) Bill, 2019 was introduced in Rajya Sabha by the Minister of Finance, Ms. Nirmala Sitharaman on July 24, 2019. The bill was passed by the Rajya Sabha after discussion on July 29, 2019. The bill was then introduced and passed by the Lok Sabha on August 01, 2019. This is the third amendment to the 'Insolvency and Bankruptcy Code 2016'. This amendment is in continuation to eliminate the difficulties and loopholes from the IBC process and strengthen the code.
This amendment was brought by the Government after the NCLAT (National Company Law Appellate Tribunal)'s verdict in Essar Steel Insolvency case. In Essar steel case, NCLAT approved steel tycoon Lakshmi Mittal-led Arcelor Mittal's Rs 42,000 crore bid for acquiring the debt-laden firm. The order had given operational creditors equal status as the financial creditors in the distribution of the bid amount. In its order NCLAT said Committee of Creditors (CoC) will have no role in the distribution of Rs 42,000 crore and said financial creditors would get 60.7 per cent of their admitted claims of Rs 49,473 crore, about the same as operational creditors. It also said the operational creditors with admitted claim amount of less than Rs 1 crore would get 100 per cent, while above Rs 1 crore would get 60.26 per cent and workmen and employees would get 100 per cent. NCLAT in its order had also ruled that the 'waterfall mechanism' under section 53 of IBC is only applicable to the distribution of proceeds in liquidation process and not in resolution process.
Financial creditors got miffed with this and appealed in Supreme Court against NCLAT order. The Supreme Court bench comprising of Justice R F Nariman, Surya Kant and Ramasubramanian started hearing on October 16, 2019 the batch of appeals challenging the NCLAT order in Essar Steel Insolvency Resolution.
Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or debt security. Operational creditors are those whose liabilities from the entity comes from a transaction on operations. Financial creditors provide long-term capital in the form of loans. Operational creditors are usually the suppliers of goods, raw materials, etc.
Key Amendments:-
1. Amendment of Section 30:-
Financial creditors are secured creditors and they take more risk in lending in a firm/company than operational creditors. If financial creditors are given equal share as operational creditors in resolution plan then it may possible that they increase lending rate in order to early recovery and it may lead to higher cost of credit. Hence to undo the equality clause of NCLAT order and provide clarity about preference to secured lenders over operational creditors and to give lenders explicit authority over distribution of proceeds, this amendment was brought.
Section 30 of the original IBC, 2016 act defines the process of 'Submission of resolution plan'. In sub section (2), clause (b), it says that the resolution plan must ensure that the operational creditors receive an amount which should not be lesser than the amount they would receive in case of liquidation. However the amendment says:
in sub-section (2), for clause (b), the following shall be substituted, namely:—
(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than––
(i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or
(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53,
whichever is higher.
i.e it says, the amounts to be paid to the operational creditor should be the higher of: (i) amounts receivable under liquidation, and (ii) the amount receivable under a resolution plan, if such amounts were distributed under the same order of priority (as for liquidation) mentioned in section 53 of IBC 2016.
Further, the Bill states that this provision would also apply to insolvency processes:
(i) that have not been approved or rejected by the National Company Law Tribunal (NCLT), (ii) that have been appealed to the National Company Appellate Tribunal or Supreme Court, and
(iii) where legal proceedings have been initiated in any court against the decision of the NCLT.
However miffed with this amendment, the operational creditors have challenged this amendment in Supreme Court.
2. Amendment of Section 12:-
As per the principle act IBC 2016, corporate insolvency resolution process should be completed within a period of 180 days from the date of admission of the application to initiate such process. This timeframe excludes initial 14 days to decide whether there is any default or not and the resolution process can be extended for another 90 days. However this timeline does not include legal proceeding.
Now the new amendment fixes the time period for resolution process to 330 days including legal proceeding and any extension granted. On the enactment of the Bill, if any case is pending for over 330 days, the Bill states it must be resolved within 90 days.
“Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor:
Provided also that where the insolvency resolution process of a corporate debtor is pending and has not been completed within the period referred to in the second proviso, such resolution process shall be completed within a period of ninety days from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019.”.
3. Amendment of Section 7:-
The amendment says that in case the NCLT does not find the existence of default and has not passed an order within 14 days, it must record its reasons in writing.
“Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.”.
4. Amendment of Section 25A:-
This amendment is important for home buyers. In last year IBC (2nd Amendment) Bill, 2018 the home buyers were declared as financial creditors. Now this amendment deals with the representative, the home buyers elect to represent them in CoC.
The IBC 2016 says, in certain cases when the debt is owed to a class of creditors beyond a specified number, the financial creditors will be represented on the CoC by an authorised representative. These representatives will vote on behalf of the financial creditors as per instructions received from them. Now the amendment bill says that such representative will vote on the basis of the decision taken by a majority of the voting share of the creditors that they represent.
“(3A) Notwithstanding anything to the contrary contained in sub-section (3), the authorised representative under sub-section (6A) of section 21 shall cast his vote on behalf of all the financial creditors he represents in accordance with the decision taken by a vote of more than fifty per cent. of the voting share of the financial creditors he represents, who have cast their vote:
Stay tuned for more updates. Feel free to comment.
This blog is now on Telegam. For reports on Economics, Current Affairs and more, subscribe this blog on Telegam.
You may also like to Read:
Home Buyers now Financial Creditors - The Insolvency & Bankruptcy Code (2nd Amendment) 2018
This amendment was brought by the Government after the NCLAT (National Company Law Appellate Tribunal)'s verdict in Essar Steel Insolvency case. In Essar steel case, NCLAT approved steel tycoon Lakshmi Mittal-led Arcelor Mittal's Rs 42,000 crore bid for acquiring the debt-laden firm. The order had given operational creditors equal status as the financial creditors in the distribution of the bid amount. In its order NCLAT said Committee of Creditors (CoC) will have no role in the distribution of Rs 42,000 crore and said financial creditors would get 60.7 per cent of their admitted claims of Rs 49,473 crore, about the same as operational creditors. It also said the operational creditors with admitted claim amount of less than Rs 1 crore would get 100 per cent, while above Rs 1 crore would get 60.26 per cent and workmen and employees would get 100 per cent. NCLAT in its order had also ruled that the 'waterfall mechanism' under section 53 of IBC is only applicable to the distribution of proceeds in liquidation process and not in resolution process.
Financial creditors got miffed with this and appealed in Supreme Court against NCLAT order. The Supreme Court bench comprising of Justice R F Nariman, Surya Kant and Ramasubramanian started hearing on October 16, 2019 the batch of appeals challenging the NCLAT order in Essar Steel Insolvency Resolution.
Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or debt security. Operational creditors are those whose liabilities from the entity comes from a transaction on operations. Financial creditors provide long-term capital in the form of loans. Operational creditors are usually the suppliers of goods, raw materials, etc.
Key Amendments:-
1. Amendment of Section 30:-
Financial creditors are secured creditors and they take more risk in lending in a firm/company than operational creditors. If financial creditors are given equal share as operational creditors in resolution plan then it may possible that they increase lending rate in order to early recovery and it may lead to higher cost of credit. Hence to undo the equality clause of NCLAT order and provide clarity about preference to secured lenders over operational creditors and to give lenders explicit authority over distribution of proceeds, this amendment was brought.
Section 30 of the original IBC, 2016 act defines the process of 'Submission of resolution plan'. In sub section (2), clause (b), it says that the resolution plan must ensure that the operational creditors receive an amount which should not be lesser than the amount they would receive in case of liquidation. However the amendment says:
in sub-section (2), for clause (b), the following shall be substituted, namely:—
(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than––
(i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or
(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53,
whichever is higher.
i.e it says, the amounts to be paid to the operational creditor should be the higher of: (i) amounts receivable under liquidation, and (ii) the amount receivable under a resolution plan, if such amounts were distributed under the same order of priority (as for liquidation) mentioned in section 53 of IBC 2016.
Further, the Bill states that this provision would also apply to insolvency processes:
(i) that have not been approved or rejected by the National Company Law Tribunal (NCLT), (ii) that have been appealed to the National Company Appellate Tribunal or Supreme Court, and
(iii) where legal proceedings have been initiated in any court against the decision of the NCLT.
However miffed with this amendment, the operational creditors have challenged this amendment in Supreme Court.
2. Amendment of Section 12:-
As per the principle act IBC 2016, corporate insolvency resolution process should be completed within a period of 180 days from the date of admission of the application to initiate such process. This timeframe excludes initial 14 days to decide whether there is any default or not and the resolution process can be extended for another 90 days. However this timeline does not include legal proceeding.
Now the new amendment fixes the time period for resolution process to 330 days including legal proceeding and any extension granted. On the enactment of the Bill, if any case is pending for over 330 days, the Bill states it must be resolved within 90 days.
“Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor:
Provided also that where the insolvency resolution process of a corporate debtor is pending and has not been completed within the period referred to in the second proviso, such resolution process shall be completed within a period of ninety days from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019.”.
3. Amendment of Section 7:-
The amendment says that in case the NCLT does not find the existence of default and has not passed an order within 14 days, it must record its reasons in writing.
“Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.”.
4. Amendment of Section 25A:-
This amendment is important for home buyers. In last year IBC (2nd Amendment) Bill, 2018 the home buyers were declared as financial creditors. Now this amendment deals with the representative, the home buyers elect to represent them in CoC.
The IBC 2016 says, in certain cases when the debt is owed to a class of creditors beyond a specified number, the financial creditors will be represented on the CoC by an authorised representative. These representatives will vote on behalf of the financial creditors as per instructions received from them. Now the amendment bill says that such representative will vote on the basis of the decision taken by a majority of the voting share of the creditors that they represent.
“(3A) Notwithstanding anything to the contrary contained in sub-section (3), the authorised representative under sub-section (6A) of section 21 shall cast his vote on behalf of all the financial creditors he represents in accordance with the decision taken by a vote of more than fifty per cent. of the voting share of the financial creditors he represents, who have cast their vote:
Stay tuned for more updates. Feel free to comment.
This blog is now on Telegam. For reports on Economics, Current Affairs and more, subscribe this blog on Telegam.
You may also like to Read:
Home Buyers now Financial Creditors - The Insolvency & Bankruptcy Code (2nd Amendment) 2018
https://politoeconomy.blogspot.com/2018/12/home-buyers-now-financial-creditors.html
The Insolvency and Bankruptcy Bill, 2015 - Part 1
The Insolvency and Bankruptcy Bill, 2015 - Part 1
The Insolvency and Bankruptcy Bill, 2015 - Part 2
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